
Mortgage Down Payments
What size of downpayment so I need?
Understanding Mortgage Down Payments
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When you're ready to buy a home, you'll need a down payment, which is a portion of the purchase price that you contribute toward the property.
Your down payment plays a crucial role in securing a mortgage and can affect your mortgage terms, interest rate, and overall costs. Here's what you need to know about mortgage down payments:
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Minimum Down Payment in Canada: In Canada, the minimum down payment required to purchase a home can be as low as 5% of the purchase price, depending on the property's price. The down payment is a crucial element of your mortgage application, demonstrating your commitment to the purchase and building equity in the property.
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Here's how the minimum down payment requirement is structured based on the home's purchase price:
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For homes priced at $500,000 or less, a minimum down payment of 5% is required.
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For homes priced between $500,000 and $999,999, you'll need 5% of the first $500,000 plus 10% of the amount exceeding $500,000.
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For homes priced at $1 million or more, a minimum down payment of 20% is required, which is considered a conventional mortgage.
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High Ratio Mortgage and Mortgage Default Insurance: When your down payment is less than 20% of the purchase price, your mortgage is categorized as a high ratio mortgage. In this case, lenders require mortgage default insurance, which is provided by agencies like the Canada Mortgage and Housing Corporation (CMHC), Sagen, or Canada Guaranty. This insurance protects the lender in case of default but comes with premiums added to your mortgage amount.
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Sources of Down Payment: Lenders typically prefer that your down payment comes from your own savings or legitimate sources. Acceptable sources of down payment include:
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Personal savings or checking accounts
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Trading or investment accounts
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Gifts from close family members
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Proceeds from the sale of a previous home or asset
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Equity borrowed from other property
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Lenders will review a 90-day history of your down payment funds, so it's essential to maintain them in a single savings account without frequent transfers.
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Ways to Secure a Down Payment: If you're a first-time homebuyer, there are government programs and incentives designed to help you save for a down payment. You can also consider cutting back on non-essential expenses, borrowing from a secured line of credit, or exploring co-ownership arrangements to accumulate the necessary funds.
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Impact on Mortgage Rate: The size of your down payment can influence your mortgage rate. Generally, high ratio mortgages (less than 20% down) may offer lower interest rates compared to conventional mortgages, but your ability to qualify for a specific loan amount and rate depends on passing the federal mortgage stress test.
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Advantages of a Conventional Mortgage: If you can provide a down payment of 20% or more, you qualify for a conventional mortgage. While this type of mortgage may result in slightly higher interest rates due to the bank holding more capital, it offers several benefits:
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Lower mortgage amount, reducing monthly payments
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Lower overall interest costs
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Faster equity buildup in your home
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Access to better product options
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Credit Considerations: A larger down payment can be advantageous if you have a less-than-stellar credit history. Some lenders may be more lenient with past credit issues if you can provide a significant down payment, typically 35% to 40% of the purchase price.
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Remember Closing Costs: In addition to your down payment, budget for closing costs, which are expenses associated with the home purchase. Failing to account for closing costs could jeopardize your ability to buy the home.
When to Provide the Down Payment: Your down payment will need to be verified during the mortgage application process, but you won't have to transfer the funds until your signing appointment with your lawyer to finalize the home purchase.
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Your deposit when making an offer on a home is considered part of your down payment. For instance, if your total down payment is $50,000, and you've already provided a $10,000 deposit, you'll need to pay the remaining $40,000 at the time of signing.
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Navigating the complexities of down payments and mortgages can be challenging, so it's essential to seek guidance from a mortgage professional who can help you make informed decisions and secure the right mortgage for your needs. MortgagePal can provide expert advice and assist you in finding the best mortgage fit with competitive rates.